Global Economic Perspectives
Exam II Objective List

BASIC CONCEPTS * Exchange Rate Risk * Selling dollar-denominated bonds but not having dollar-denominated sales * China’s real estate bubble * How to avoid: * Currency swaps * Future markets * Currency pegs * Setting the currency equal to a specified value * What factors determine exchange rates (pegging and managed floats) * High interest rates Appreciation & recession – increased demand & price * Stronger currency favors importers (trade surplus) * Low interest ratesDepreciation & Expansion * Weaker currency favors exporters (trade deficit) * The role of the IMF * Make emergency loans to countries with balance of payment problems * Ensures stability of national monetary system * Fiscal Policy * Government changing taxes and/or government spending in effort to increase or decrease business activity * Expansionary FP leads to increased spending but downside is budget deficits * Contractionary FPleads to budget surpluses or smaller deficits * AKA Austerity (attempt to shrink growing deficits) * Monetary Policy * Central Banks changing the MS to increase or decrease the availability of credit in an effort to increase or decrease business activity * Primary tool is Open Market Operations * Buying and Selling short term securities * Dual Mandate Inflation & Unemployment * ECB does not have a dual mandate like the Fed

THE EUROPEAN UNION (EU) * Explain the purpose of an “economy” from a European perspective * Equity & Leisure more important than consumption * Social goals more important than individual goals * Market for production; Government for Distribution * Explain the demographic challenges facing most European countries * Demographic decline, low natural growth, and aging population * * Explain the difference between the EU and the EMU. * EMU – (Economic and Monetary Union) Coordination of economic policy-making between Member States * Coordination of fiscal policies, notably through limits on government debt and deficit * An independent monetary policy run by the European Central Bank (ECB) * Single rules and supervision of financial Institutions within the euro area * The single currency and the euro area * EU - coordinates EU economic policy-making and decides whether a Member State may adopt the euro * type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy.

* Explain the reasons for the formation of the EU * Explain the purpose of social policies * Intent to correct the result of what the invisible hand of the market can achieve on its own 1. Redistribution of wealth 2. Income & Standard of living maintenance 3. Helping particularly disadvantaged social groups/regions 4. Public safety nets 5. Economic governance 6. Poor relief * Explain why the Common Agricultural Policy and the Cohesion and Structural Funds present a problem in the EU expansion * Cohesion and Structural Funds Revenue sharing to build infrastructure * EU ran out of money, could not give all benefits to all European countries (not that important) * Explain the consequences of a high replacement ratio. * Percentage of wage that you get when you lose your job - compensation * High ratio will incline people to stay unemployed * High ratio in Europe * Lower replacement ratio in US * Explain the consequences of a high dependency ratio. * Applies to demographic drag * Old age dependency ratio for developed countries * Higher Government spending * Lower pension funds * Explain what a Gini Coefficient measures * Frequency distribution (levels of income) * Lower numbers mean more equitable * Europe much more equitable than the US * Explain why unemployment is so high in Western Europe * Reduced demand – high cost of labor * Payroll taxes to support retirees and unemployed * Reduced supply – low cost of unemployment * Euro firms allowed little flexibility in lay offs * Euro losing FDI and export markets * Europe suffering from high long term unemployment * Drop in demand not cushioned by falling wages * Define social policy and the “welfare state.” * Welfare state embrace government activity in the field of poverty relief, education, individual retirement, housing, and healthcare * Promotes social well being based on: * Equality of opportunity * Equitable distribution of wealth * Public responsibility for those unable to have a good life * A distinctive combination of democracy, welfare, and capitalism * Social Policy intent to correct the result of what the invisible hand of the market can achieve on its own * Understand and apply the concept of co-determination * Employees have a role in the management of a company * German model of Capitalism

SUBPRIME CRISIS AND THE EURO * Understand the problem with mortgage backed securities that contributed to the global financial crisis of 2008 * When you invest in a mortgage backed security you essentially are lending money to a home buyer or business * Bank acts as a middleman between the home buyer and the investment markets * Losses in the mortgage market grew, investors gradually began to avoid all risk global asset prices fell, liquidity dried up * List the Maastricht Treaty’s convergence criteria and explain why it was difficult for member countries to achieve these targets and especially the target of the Stability and Growth Pact. * Convergence criteria * Inflation (lowest + 1.5%) * Government interest rates (lowest + 2%) * Budget deficit < 3% of GDP * Total government debt < 60% of GDP * No devaluations for 2 years * Problem * Cutting spending or raising taxes to reduce the deficit during recessions would make existing economic conditions worse. * Countries had to make sacrifices to meet the convergence criteria * Becomes a de facto austerity program * What is the key feature of the Pact? * Member countries are required to keep government budget deficits less than 3% of GDP and total debt under 60% of GDP * This limits each member’s ability to use fiscal policy * * Why weren’t the interest rate and inflation criteria kept as part of the requirements after the euro was adopted? * Germans feared inflation * Explain the benefits and costs of adopting the euro * Benefits: Stability, Lower transaction costs, greater certainty for firms * Drawbacks: Loss of ability to manipulate currency, Loss of ability to use MP & FP * Explain how Greece and Spain got into the messes they are in (what caused their crises) * Southern countries had Low Productivity, High Inflation * How did converging North-South interest rates contribute to the problem * Resulted in currency depreciation to keep trade deficient at a minimum. * Increased borrowing from Northern Countries*** * Explain what internal devaluation is and why it is necessary for Spain * Means lowering wages * Meant lower wages for Spain * Explain why the “southern” euro-zone members cannot compete with the “northern” members * Interest rates were too high which resulted * They weren’t able to export anything because it cost to much to make stuff * Explain why fiscal and monetary policy options are limited in the EMU * Deficet to high, borrowed when rates were low and wanted paid when rates were high. * Understand the problems with “austerity plans” and “Keynesian growth policies” as possible solutions to the euro crisis * Won’t work * Austerity * Problem – makes current economic situation worse * Cutting government programs will further worsen economic inequality and social immobility – major concerns of the welfare state * – slow economic growth… takes too long * Keynesian Growth Policy – * Fiscal policy: boosts aggregate demand by (larger) budget deficits * Deficits are already too high in most countries for FP * Tax cuts & increased transfers may be saved (not spent) * Monetary policy: boost AD by increasing money supply * Adopt a dual mandate to replace single mandate of the ECB * Now being used a little (to German dismay) * Explain why the Germans are resisting expansionary money policy in the EMU * Keep prices stable * Keeping unemployment low * Don’t want inflation *** * Explain what euro bonds are and why the Germans (and other “Northern” countries) do not like the idea * Bonds backed by all Eurozone countries * All governments could borrow at same rate * German Objections i. Having to co-sign bonds issued by others ii. German borrowing costs would rise (Germany has better credit that Eurozone as a whole) * Explain what rebalancing is…and why the Germans do not like the idea * The ECB and German government may need to stimulate high wage inflation in Germany for several years in order to eliminate the country's current massive competitive trade advantage over southern Europe * Fiscal transfers to prop up economies until they have regained their competitiveness

* Explain the consequences for Greece if it abandons the euro and returns to the drachma * Capital flight * Drachma would depreciate * Explain what is meant by the ECB’s single mandate (as opposed to the Fed’s Dual Mandate. * Germans fear of inflation and ECB only targets inflation * Rotating chair – currently Mario Draghi (Italy) * Who are the members of the troika that are responsible for EMU bailouts? * IMF * ECB * European Union * Understand what quantitative easing is and how it helped Greece * Lower prices to create greater consumer spending which leads to more jobs, reduces interest rates, and creates people to borrow more which boosts the economy

COMPARATIVE ECONOMIC SYSTEMS * Explain the differences in the “type” of capitalism practiced by the U.S., Europe, and Japan (basic philosophies, institutions, and outcomes). * Japan -are social institutions, providing social cohesion and taking on many roles that in other countries are performed by the state. By contrast, the Anglo-Saxons view companies as money-making machines that can be freely bought, sold, merged and dissolved in order to maximize returns to shareholders. * ***Emphasizes consensus & national strength * Europe – Focused on social well being * Co-determination * US – relies on market coordination * How, when and why the government “gets involved” (Steering v. the Welfare State) * Takes from the rich and gives to the poor providing a safety net for social needs * Steering is the production side for Japanese, Welfare state is Europe * Explain the differences in labor policy * Understand who different countries believe to be the important stakeholders in domestic businesses * Japan: Owners, employee’s, suppliers, and customers * Explain the impacts of old age and youth dependency ratios (Demographic Dividends and Demographic Drags) * A demographic dividend would be associated with a low dependency ratio** * Be familiar with dependency ratios in different parts of the world

JAPAN * Describe the historical growth Japanese economy – boom and bust. * Explain why it grew and why it has declined. What problems is it facing? * Grew because of education and lifetime employment in the 1960s and 1970s * Look at the different reasons that are offered – were there plusses and minuses for each? * Education, labor force, industrial policy, savings rates, export based economy * The difference between freeters (unemployed young people) versus salarymen (full-time employees) – and why the former are losing out * Dual labor market * Political influence of older generation is hurting the youth * Explain the significance of “Womanonomics” * The need for the extra labor and output resulting from more women in the labor force * Attempt to adapt to falling population * Large gender gap in executives, managers, politicians * Day care (government controls and 6:00 PM limit) * Taxes and pension “penalties” if spouse earns too much * Nominication – Necessity of drinking late with boss * Know what the Black Ships were and how they impacted Japan culture * National strength, western vessels that came to japan in the 16th and 19th century * Promoted trade * Explain how the Japanese government steers its economy * METI and industrial policy * Ministry of Finance and directed credit (the Postal Savings Bank) * Explain the causes and consequences of Japanification * Prices fall * Jobs disappear * Know which countries have experienced “housing bubbles” * United States * China * Japan * Understand what deflation is and why it is a problem * Who loses? Businesses unable to pay their debts * Understand what the kiertzu are and how they can limit foreign trade. * “Headless Combine” * “Controls the Flow” NOT “Goes with the Flow” * Identify the three parts of the Japanese Iron Triangle * Bureaucracy * Business * Politicians

ECONOMIC DEVELOPMENT * Identify the four Asian Tigers * The highly developed economies of * Hong Kong * Taiwan * Singapore * South Korea * What policies did they have in common that led to their economic growth? (Importance of institutions) * Large Exports * Rapid industrialization * POLICIES: Free Market & Competitive Advantage ** * What is a chaebol and where would I find one? * South Korean form of business * Family owned business * Identify Korean companies * Hyundai the car company * Samsung * Who are the Sisters in Time and what do they have in common? * Willing to work in terrible sweatshops, because it beat life working on a farm * Explain the connection between sweatshops and economic development * Labor intensive jobs for unskilled workers * Explain the connection between urbanization and economic development * Getting people off the farm to cities * Provide an example of the resource curse and the Dutch Disease * Resource curse all energies go into selling the commodity * No attention to diversifying the economy * Reduced incentive to develop * Competition for the resource leads to corruption * Governments usually own the resource and it leads to political infighting * Dutch Disease appreciating currency and non-competitive agricultural and manufacturing sectors * Lack of diversification * Explain the difference between in intensive growth and extensive growth * Intensive – increase output by better technology * Extensive – increase output by increase in inputs * Know the consequences of colonization in Africa (the irredenta) * People from one culture that find themselves isolated after colonists left * Countries are diverse and lumped together- unhappycivil wars * Explain what import substitution development policies are * Used by India * Produce products domestically * Tariffsin place * Local people not given a choice
CHINA
* Explain the differences in Mao’s economic policies and Deng’s economic policies * Mao most noted for economic failure and famine * Deng Household responsibilities system * Town and village enterprise * Grow around the plan * Bicycle economy

* What were the results of the Great Leap Forward? * Schools, old aged homes, health care, backyard furnaces * Understand what it means to “grow around the plan” * Growth dictated by the planners * Keep the quota * Understand the significance of the “household responsibility system” * Produce something beyond the plansell it * Explain the meaning of “The color of the cat does not matter…” and “The bird in cage” in the context of Deng’s reforms * Do what works regardless of the ideology * What is pragmatism and how did it apply to Deng’s China? * Seek truth from facts * Be able to identify problems that might slow China’s growth * Pollution, aging labor force, inflation, water shortages, mal-investment, housing bubble, etc. * Be able to describe China’s geography and population patterns * Urban Population Wealthy * Rural Population Poor * Public health, education, and retired system lacking compared to urban population at rural expense * Population * Aging * 1 child policy * Explain how China helps borrowers/SOEs at the expense of savers * Led to them at cheap rates * They face little domestic or foreign competition * Get cheap energy * Payout limited dividends * Understand the relative importance of C,I,G, and NX in today’s Chinese economy * What gives China’s communist leaders their “legitimacy?” How do they stay in power? * What is meant by a bicycle economy? * Move forward or fall * What are the objectives of China’s Going Out policy in Africa? * Ethiopian sweatshops * Describe the causes and the impact of rising Chinese wages * Demand for labor grows faster than the supply creating labor shortages causing prices of labor to rise * What is meant by “One Country, Two Policies”? * The Urban and rural areas are basically two different systems with the state using different systems and polices * Describe the behavior of Chinese consumers * How are they becoming more sophisticated? * Value seekers * What are the consequences of China’s one child policy and gendercide? * Too many young men